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Vale S.A. (VALE) Q1 2021 Earnings Call Transcript

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VALE earnings call for the period ending December 31, 2020.

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Vale S.A. (VALE -2.54%)
Q1 2021 Earnings Call
Apr 27, 2021, 11:00 a.m. ET


  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


Good morning, ladies and gentlemen. Welcome to Vale's Conference Call to discuss the First Quarter 2021 Results. [Operator Instructions] Later we will conduct a question-and-answer session and the instructions. [Operator Instructions] As a reminder, this conference is being recorded and the recording will be available on the Company's website at at the Investors link. This conference call is accompanied by a slide presentation, also available at the Investors link at the Company's website and it's transmitted via Internet as well. The broadcasting via Internet, both the audio and the slide change has a few seconds delay in relation to the audio transmitted via phone.

Before proceeding, let me mention the forward-looking statements are being made under the safe harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from that anticipated in any forward-looking statements as a result of macroeconomic conditions, market risks and other factors.

With us today are, Mr. Eduardo De Salles Bartolomeo, Chief Executive Officer; Mr. Luciano Siani Pires, Executive Vice President, Finance and Investor Relations; Mr. Marcello Spinelli, Executive Vice President, Iron Ore; Mr. Mark Travers, Executive Vice President, Base Metals; Mr. Carlos Medeiros, Executive Vice President, Safety and Operational Excellence and Mr. Alexandre D'Ambrosio, Executive Vice President, Legal and Tax.

First, Mr. Eduardo Bartolomeo will proceed to the presentation on Vale's first quarter 2020 performance and after that, he'll be available for questions-and-answers.

It's now my pleasure to turn the call over to Mr. Eduardo Bartolomeo. Sir, you may now begin.

Eduardo Bartolomeo -- Chief Executive Officer

Thank you. Good morning, everyone. First of all, I hope you are all fine. In the first quarter of 2021, we kept our guards off in our operations as the complete pandemic accelerated in Brazil. We have kept all safety measures and revision procedures adopt in operations. And I want to reinforce that only essential professionals are allowed in our sites. In April, we've completed 13 months since the start of restrictive measures against the pandemic, and over to 25% of our workforce is still working remotely. Safety, people and reparation, this words have been our priority to since 2019 and they continue to make more sense now in this very critical moment for all of us.

Well, a crisis of this dimension requires the urgency to do what's in -- within our reach in the best way and as effective as possible. We have been collaborating with governments and communities since the beginning and we continue to focus our efforts on the most critical items in this fight. For this reason, Vale and other companies have forces to buy and donate 3.4 million medicines for intubation. In contribution to the national immunization plan, Vale allocated resources for the expansion of the vaccine production of the Butantan Institute with an estimated production capacity of up to 100 million doses per year and for the donation of 50 million syringe to the Ministry of Health of Brazil. We are attentive so that our support is accurate and effective and that our help directly reach the people need. This is part of our new path to society.

As I have been saying at each of our meetings, Vale is the determined to fully repair the damage caused by the Brumadinho strategy. A major step in that direction was the signing of the global settlement in February. The decision, their ratified agreement became final at the end of March, bringing another layer of legal certainty for the reparation. One of the things that progresses consistently is that of water security. We are working on the commissioning of the construction works for a new water pipeline to supply the metropolitan region of Belo Horizonte with around 6 million people. At the same time, the reparation of individual damage is progressing. Since 2019, more than 10,000 people have been part of civil or labor indemnification agreements with Vale, which sum up to almost BRL2.5 billion. We remain committed to a fair and prompt reparation for Brumadinho and effected region.

Talking about then, safety. At the works to improve stability. We have already removed the emergency level of four structures this year. We hope to reduce or remove the emergence level of another four structures still in 2021. Restabilization works and actions and respecting the safety of the process, by the end of 2025, we hope to achieve satisfactory conditions for all 29 structures, which are at the emerging level to date as can be seen in the graph. We remain firm and progressing in the culture transformation toward a safer half.

Last April 15th, we launched our integrated report with the main information on values, economic, environmental and social impacts. This is another deliver it from Vale as a result of listening to our stakeholders. This document in addition to presenting our ESG performance in detail, helps to demonstrate how strongly our ESG strategy is connected to our business. Another point -- important point is that it provides detailed information about our risk management, including our assessment of emerging long-term risks. With that, we closed one more ESG gap plan for 2021, totaling 39 gaps since 2019. As can be seen, our ambition is to transform Vale into a reference in ESG practice.

Well, now talking about our operational results. We started 2021 with the performance as expected, with a good improvement compared to the first quarter of last year. Our adjusted EBITDA was $8.5 billion, the highest in our history for a first quarter, which is seasonally weaker in volumes. In iron ore, we made progress in stabilizing production, resuming the rest of the capacity halted at the Timbopeba site and at the Vargem Grande pelletizing plants. Our beginning of the year was stronger in 2020. We produce in this first quarter, which is seasonally weaker, the same as we produce in the second quarter of 2020. This gave us a lot of confidence in reaching our production guidance for this year. Spinelli will give more details on that later.

In nickel, we also performed as planned. Very stable operation in Onca Pumaand in the North Atlantic refineries, with Long Harbor reaching a record production levels in the first quarter. In copper, however, we underperformed with a drop of 20% to 30% in volumes of Salobo and Sossego. This is because we are reviewing Salobo processes, aim to improve the safety of our operations at that site, therefore impacting mine movement. In Sossego, we had longer maintenance due to the difficulty of mobilizing contractors because of COVID-19.

On another front, in terms of addressing our cash drains, the sale of VNC operations was an important step in the commitment to transform our business. This commitment was made to our shareholders in the end of 2019 and delivered in a very responsible way, with the creation of a local solution that meets the demand of all stakeholders. We also signed the agreement for the acquisition of Mitsui stake in the coal and logistics operations in Mozambique, an important step toward our divestment in that business. Another commitment made to our shareholders. In the sense, another relevant step was the conclusion of the revamp of the Moatize processing plants, which will allow us to achieve a production rate of 50 million tons per year in the second half of 2021.

In summary, we continue to take the necessary actions to stabilize our production, ensure growth options and allocate capital in a disciplined way. And speaking of discipline in capital allocation, we presented one more evidence of our commitment to returning value to our shareholders, with the announcement of the share buyback program this month. We are confident of our ability to deliver our derisking and maximize value creation for our shareholders in the long-term. We believe the buyback is one of the best investments for the company and one that does not compromise the continuity of dividends, higher than the minimum set borrower falls.

With that, to concludes, summarizing for you, we are making progress with the reparation of Brumadinho quickly and fair. We continue on the path to build a culture of safety environment. We are working hard to make our operations more stable and predictable. Our ESG commitments and strategy are increasingly [Phonetic] linked with our business. And finally our capital discipline remains unchanged. Most importantly, I assure you that we are doing everything we can to ensure the safety of the people in our operations, in our communities. I would like to thank our 70,000 employees, our contractors, suppliers and customers for their resilience in high regard during this critical moment through the COVID-19 pandemic.

Now, I pass the floor to Spinelli, who will give more details on the performance of iron ore. Thank you very much.

Marcello Spinelli -- Executive Vice President, Ferrous Minerals

Thank you, Eduardo. Good afternoon all. Well we've been predicting about the resumption plan to reach a 400 million tons next year. I'm going to use the same slide to facilitate our explanation and start up in my left-hand side. So you see the bar today. Today remember that the concept that don't evolve from now, that's the capacity we have for the year. We came from a number to 320 last quarter, now we have the 327. We had an additional capacity in Timbopeba 7 million tons. Remember that we were running with three lines. We had the start up of other three line, so we have full capacity Timbopeba now, but should be 325. So we have a minus two that we already updated the forecast of Itabira. Itabira, last call, we said that would reach a minus 9, we still have this minus 7 as a buffer for Itabira. Itabira, we have a temporary problem there with the lack of capacity for disposal of the date [Technical Issue] As we evolve during the year, we can update this minus 7 but we already put here the minus 2, so that's the number of capacity today.

I want to highlight also in the right-hand side at the bottom, the information of Vargem Grande. Now we -- we now have the start up of the tailing infiltration plant. We are not adding yet a capacity here, it will be important to the second half when you have the whole picture of Vargem Grande growing, but it's important milestone. That's the first plant of a sequence of plants coming from Brucutu and Itabira and it's important milestone to highlight.

I want to emphasize that we are really committed to deliver the production guidance for this year. Our range from between 3.15 to 3.35 million tons. What support this prediction? Well, at first --firstly, we started this year in a very better way compared to the Q1 last year. As Eduardo said, we added 8 million tons this year compared to last year. Seasonally the second quarter is better than the first quarter, which you know very well that due to the end of the rainy season in the South and the Southeast of Brazil. Even in the North, we still have the rainy season there, but June is usually drier than the other months of the rainy season. So, we are confident that to improve our production -- and again, a firm that we have our guidance in perspective.

There is another share -- there is another information. The last Q2 -- Q2 last year was the same one last year, so that's another information that we are growing to achieve the guidance. And also we have many actions that I'll follow up with you in the next slide. Our roadmap to achieve the 400 million tons. First information, in the Southeastern Vargem Grande next week, we are advancing our tests with the conveyer belt. This test is a vibration test. We must check the impact in our upstream dam in that site. Fabrica is already testing the wet processing. We expect to have the final permit from ANM, the national agency of mining to keep the operations. We expect to do this in the end of this quarter.

And steel in the Southern System in Vargem Grande, we are bringing online Maravilhas III dam, this is a very important asset for the second half. We have some civil works there to finish and important information we already have all the permits to start up this asset, only leasing the declaration of instability that's only in the end of the construction we can get. Also, wanted to drag your attention to the Southeastern System and it's a important information. The good news here in Itabira, we are anticipating a partial operation of the filtration plant. This will allow us to offset that buffer, the risk capacity that we have in Itabira to minus 7 that I mentioned the first, you're keeping here, but we are trying to anticipate it now already have in our plan the anticipation to bring -- to use the filtration and try stack the payment.

And I want to update you also about Brucutu site, an important asset that also -- are also coming online, that is Torto dam. We are -- during the middle of the construction, we expect to finalize this construction during this year, but differently from Maravilhas III, we don't have the final permit, you have to apply in the process of one month to two months. But both processes construction and permits, we intend to have all completed this year. If you have any delay, it's important to say that we have a back up position with the start up of the filtration in Brucutu. Remember that we have filtration come in Vargem Grande and Itabira and is expected to start up in the first quarter of next year.

I'll be here for further questions in the Q&A session. I pass to Luciano.

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

Good morning, good afternoon. Some highlights on the financial results. Starting by cash flows. As you saw, they were very strong in the quarter. Working capital had a positive contribution of $550 million. May have been surprised, but actually the very strong sales of the fourth quarter of last year were collected this quarter, more than $1.4 billion in reduction in accounts receivable. And remember that prices spiked at the end of December, remain strong in January, so that was the reason why working capital evolve positively.

Despite also the first quarter be very heavy on other payments, like payment to suppliers, inventory build, profit sharing with employees, but still working capital moves positively. Still on working capital, you may have noticed that the price realization didn't actually move in parallel with the Platts price and why was that? If you look at the fourth quarter, the average iron ore price 62% for the quarter was $134 million, whereas the provisional price at the end of the quarter was $158 million, because of the increase in December. So there was a very strong recording of EBITDA in the fourth quarter on the back of the provisional sales, whereas in the first quarter, what happened was the opposite. The average price for the quarter was $167 million and the provisional price at the end of the quarter was still $158 million, $159 million actually. So the opposite, like provisional prices dragged down, the average price realization for the quarter, even more so compared to the fourth quarter and we stay pulled up.

And so something to notice is that those sales that were recorded and $159 million this quarter, they will be repriced at today's prices once ships arrive at ports. So therefore, you could expect a carry-over of EBITDA of maybe about USD300 million from sales from the first quarter toward the second quarter, cash and EBITDA. Talking about costs, C1 costs before third-party purchases, we need to look before third-party purchases, because the prices have been going up sequentially, they were in line $14.8 per ton compared to $15 per ton in the same quarter of last year. However, despite the depreciated Brazil real and we now can see that for the year 2021, the costs are going to stay, and like I said in the last call, slightly higher, about $1 higher than last year on average. And why is that?

We have about $0.70 of impact from diesel prices, which increased substantially in dollar terms from last year and there is another $0.30 that will come from a shift in the mix. Because of the very high prices that we experiencing, we're doing some opportunistic production in sales, especially from the Midwestern System, which is very high cost has costs around $40, $50 per ton. We're increasing sales from there. And although by a small proportion it does impact about $0.30 the mix as a whole and C1 before third- party partners.

Also on our competitiveness, some words on freight. You saw the recent spike in freight rates toward spot freight rates toward $28 per ton. Under this backdrop, actually the freight rates within Vale, they do not increase much from just to $15.7 per ton. But if things stay this way and as we use more spot freight in the second half, because of our higher production, we should expect about $1.50 increase on average freight for Vale in the second half, because of that spike in spot freight rates.

Finally, a word on New Caledonia and base metals. Just a reminder, from now on, you will not record under the base metals EBITDA the losses of New Caledonia, which were running at around $50 million, $60 million per quarter. And remember, also about a year ago, you didn't have also Onca Puma also operating. So today, as compared to one year ago, we have Onca Puma generating around $50 million per quarter and New Caledonia out saving another $50 million per quarter, so a net $100 million per quarter improvement in results at the same conditions of prices compared to last year. So this things start to make a difference as time builds up.

Finally on capital allocation. This is no doubt the big questioning, what are you going to do with the money with these higher prices? I want to call your attention. We have had a lot of consistency and things are evolving quite quickly. Just a year ago, we were with the dividend policy suspended, we weren't in the middle of the first wave of COVID-19, a lot of uncertainty, markets diving, the reparation of Brumadinho consolidated. And then in the second half of last year, once the first wave ended and reparation advanced, we resume the dividend policy and we paid over $3 billion. Then in November, prices started to -- actually early December, prices started to increase from the level of $120 million toward higher prices. Still, but from Vargem agreement was still in discussions, so we didn't know what to expect. But finally February once the -- we reached the agreement and prices kind of situated at a higher level than $120 million, we decided to pay another $4 billion in dividend despite the burden from the Brumadinho agreement.

But prices then were still fluctuating from -- picked up a $170 million then down to $145 million. But after they are stabilized at $160 million, in April, then we announced earlier this month, the $5 billion buyback and now here we are again, running after prices which are now at over $190 million, and naturally, it will create more options for cash flow allocation. So as you can see the recent story has been a progress within Vale and upward surprises in the market. So what will be our response?

There is nothing new in our response. As we have been doing, we will make decisions and we will announce those decisions that will prioritize return to shareholders. The story remains the same. We're going to be consistent. It could be an acceleration of the buyback, we can finish the buyback earlier. It could be another increase in dividends above the minimum, it could be both of them. So you should expect that we will continue to follow this track record of returning consistently money to shareholders.

The next question on the balance sheet, is it inefficient? That lot of people start to ask this. First a note here, with low interest rates, so about 3% on a 10-year bond for Vale, the value of the tax shield if you increase leverage is relatively small. So for example, if you had $10 billion on debt at 3% rates you're going to save approximately $90 million per year in pre-tax payments, for $10 billion additional debt. So if you want to a meaningful reposition on the balance sheet in order to really take advantage of tax shields, you should add $30 billion, $40 billion in that to the balance sheet, which obviously in a cyclical industry, you wouldn't do that, right. So these tax savings,, they should be weighted against the opportunities that the financial flexibility, that today we have, that may bring in the future and that's the calculation we are making. However, I also note that these $10 billion expanded net debt targets we've established that two, three years ago, when prices were around about $80 per ton. And with the expectation of stronger for longer prices, we obviously could increase leverage and we are evaluating that. And most important, if we have the opportunity to deploy the additional capital in a smart way, so that's how we're thinking now about the balance sheet.

And now let's hand over to Q&A.

Questions and Answers:


Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Alex Hacking from Citi.

Alex Hacking -- Citigroup -- Analyst

Yeah, good morning, everyone, and thanks for the time. I guess I wanted to ask about the potential for a base metals spin-off, that's creating some headlines this morning. If you could just give us some color on where you are in your thought process there? What kind of transaction you would -- potential transaction you would be considering? What kind of assets you would be considering putting in it? And then what would be the sort of logic behind any potential transaction? Thank you very much.

Eduardo Bartolomeo -- Chief Executive Officer

Okay, thanks, Alex. Well, let me be clear here. It's a -- obviously, we are always analyzing this opportunity, OK? That's the main, how can I say, driver behind us. What is really pushing us to that situation, I think it's two-fold. One is that, we are in the midst of the foundation of recovering the business and we believe we are on the right track. And secondly, we are undervalued, mostly on the value as a whole and on base metals story. So it's a clear way to unlock value just on the basis of the multiples. So what we said and I would be clear now, to me -- to give you where our minds are, it's in the exactly the conceptual phase of analyzing, what does that mean.

First of all, let's put it this way, we have assets, as you know in Carajas, they are intertwined with the iron ore assets, we need to find out a way to how we deal with that. That's one issue that we are -- that we have to deal with, how we organize ourselves inside. So there are several aspects within the -- how could I say, the pre-condition to do the business where we are studying, that said, analyzing.

What is important? And then I might -- because now we are in the English, so I can ask Mark to help me on that. We have, first of all, as I mentioned before, to work on the foundations and on the narrative. The foundations are very clear since the beginning. We need to get the North Atlantic Operations productive and operating adequately. We need to replace capacity so Voisey's Bay, Salobo III, Copper Cliff mine. And the sales of VNC.

One of the things that triggered us as well as, as you asked about our mines, where they are, is the sales of VNC. It unleashes us to think differently about the business. But I'll ask Mark, because heading the business, and I was heading beforehand as well. What is the narrative?

I think Vale has a unique narrative here that we might be able to exploit. But not to be overly repetitive, we are on a phase of studying it, analyzing the possibility. Could you help me with that, Mark?

Mark Travers -- Executive Vice President, Base Metals

Sure, Eduardo. And Alex, I think, Eduardo set out very well, like the path really is to make sure that we get the optimal value for base metals and he spoke about the need to build the foundation. Maybe the narrative or maybe the strategic direction to optimize value, I can spend a minute or two on it. So, I think, more and more we're focusing in on copper, nickel and our business as a key for our participation in the decarbonization of the economy, and we clearly have lots of opportunities which we've described in previous calls, and on Vale Day around copper, where we have a current pipeline of projects that should bring us to about 500,000 tons of copper per year and in the next few years, with Salobo III, Cristalino, Alemao. We also have a number of projects around the Carajas area which can optimized through synergies with the iron ore business in the current infrastructure in the area, plus some other options for example Victoria project in Canada and Project 2, who can that can get us up to 900,000 tons. So clearly, even within the internal pipeline, we have significant opportunities for growth.

On the nickel side, we spent a lot of time recently talking about the dynamic of electric vehicles and what it's bringing to the industry and clearly, we are going down that path of the electric vehicle penetration in the auto industry and the inclusion of nickel in the batteries for those vehicles. Our approach is that we have the products. We have the products that have diversity and quality and form to go into the electric vehicle battery and we have the ESG credentials and we continue to try and build those, and those credentials relate to the low carbon intensity of our product coming from well-regulated respected regimes such as Canada. So really what we're going to really focus in on is, seeing a -- that narrative or opportunity to build in this area. Currently just by -- just to give a little bit of an update, we have buyers who are very interested in the products that we produce right now in the electric vehicle space. We currently -- recently signed a significant multi-year contract with a OEM. It will -- it represents about 5% of our Class 1 nickel and we see further opportunities to grow these the sale of our Class 1 nickel into this space.

We have some other opportunities there in terms of moving our customer products around. We have some opportunities with maybe some relatively smaller investments to repurpose some of our production lines to get a little bit more out, and then we have other opportunities for growth, which we look at. And we have a -- we have a lot of government interest talking to us to try and tease some of this sales. So in the end, we're looking to build up to about 30% to 40% of our Class 1 nickel going into the EV space. So Eduardo, I think that's probably the narrative that I would give in terms of how we increase value within the Base Metals business.

Eduardo Bartolomeo -- Chief Executive Officer

Yeah. And Alex just conclude, it's a process that -- as you asked, there are several questions that have to be answered. We are in the initial phase of going back to that deal that we had in 2014, but in a much different way. Now we think we have a better foundation. We have still work to do in the foundation. We have a better narrative now. And of course, there are several questions that has to be answered as you asked, how would be the potential transaction? We didn't get to that yet. We are just in the beginning phase of analyzing the possibility to unlock when. I hope I have answered your question.


[Operator Instructions] Our next question comes from Timna Tanners with Bank of America.

Timna Tanners -- Bank of America -- Analyst

Yeah. Hey, good afternoon, and thanks for the color. Wanted to get your perspective on the situation in China. It's been interesting to watch iron ore prices rise, even as China talks about cutting production and yet very little production actually cut as you point out in your release in the first quarter. So just wanted a little bit more of your perspective on what's happening there and what you see happening as the year progresses? And then if I could, a second question is just on, any impact that we should think about or prepare for, with regard to the Samarco bankruptcy filing. Thanks guys.

Eduardo Bartolomeo -- Chief Executive Officer

Go ahead, Mr. China Spinelli.

Marcello Spinelli -- Executive Vice President, Ferrous Minerals

Hi Timna. Thank you for the question. Well, China we -- as you said, we are -- no, we have two points, two main questions actually. We have a solid demand, based on the stimulus and based on all trade war problem that's started some time ago. China is going really well. All the indicators you can see coming from properties of 7.8 growth rate, considering we are manufacturing, and infrastructure, a lot of start -- new starts last year, under construction this year. So we have the scenario of a fantastic demand coming.

The point -- the question that we have open here and for how long we're going to have this? So in our perspective, we don't see a huge process to stop this, we see as a smooth process coming on the second half, we don't see this in this half. We are going to face a stronger demand the next -- in the next quarter. But for the last of the year, we can see something going along in a smoother way.

On the other hand, this huge supply as you said, China just after the two sessions with the party meeting, they came to the world as a country that definitely are going after the government position. They are really -- be really strong about this.

We saw [indecipherable], as you see, the second question is, how will be the rollout of these goods? We see our market intelligence, we can see that they are -- can be I mean really seriously this time, we can see Cesar try to control this process with their three actions that they see, three -- two which we don't do, they say that if you want to cut, cut the guys that didn't -- their homework, their swap production or they didn't follow the permitted to get something in two years, three years ago or they are not compliant to the ultra emissions, low emissions that should compliance. And although they see that if you are complying to the ultra emission, part of the production are going really well this in this area that you should allow.

So again, what we can see, the inventories declining, blast furnace in a very high utilization, so the scenario Timna, for instance, is to have high prices began to declined in the second half, and mostly high premiums. We can see a support for the premiums for the whole year. If you consider that the utilization of those trends will be high, price obviously will be high, margin is high, so the scenario for our forecast is to have the premiums in this level for the whole year.

I'll pass to Luciano for Samarco.

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

Timna, while it's going to be a BHP as well, we're going to be a spectators in the Samarco JR bankruptcy filing. So the company has started to operate, the creditors have got some sentences in their favor, that the company no alternative but to file for JR. Process will take at least 240 days by law likely more. The company is generating operational cash flows, those cash flows will be available for distribution to the creditors. This is going to be done through an organized process in court, and we don't have any expectation to have residual equity value from Samarco, and also there is no expectation whatsoever of any additional capital injections to support operations at Samarco, given that the debt is non-recourse to Vale and BHP. So we're going to be at the stance watching what's going on.


[Operator Instructions] Our next question comes from Mr. David Gagliano with BMO.

David Gagliano -- BMO Capital Markets -- Analyst

Hi, thanks for taking my questions. I just wanted to drill down a little bit more on the capital allocation questions and issues. First of all, have -- has Vale bought back any of the 270 million shares associated with buyback that was announced in April?

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

Okay, David. Yes, we have, you're going to see the monthly reports, we are required to file with the securities regulator in Brazil, so it's going to be available for everyone. However, just notice that we had blackout period because of these results issued yesterday and therefore in the 15 days prior to the issue of the results, we were not able to buy back any shares by regulation.

David Gagliano -- BMO Capital Markets -- Analyst

Okay. And then just going forward, obviously you mentioned it obviously after regular dividends, total capex, Brumadinho payments are still a lot of cash here. And so the question in terms of a little more detail in terms of how you -- how we should expect from a cadence, from a timing perspective and in what form, should we expect these incremental shareholder returns over and above the regular dividends? Is this something we should be expecting before say for example, the next regular dividend payment?

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

We haven't discussed that. So as you said, the regular payments occurred just in March and September, so the more obvious way to allocate return cash to shareholders in between is through an acceleration of the buyback. But this could be discussed with the upcoming Board, which will be elected if we should or not do something entering.

Eduardo Bartolomeo -- Chief Executive Officer

Luciano, just to add on that. I think the word -- keyword here, David is consistency, right. We don't want to be stuck to the September, March dates, but of course we need always to gauge the market that we are in, sometimes overly optimistic sometimes wonder over-pessimistic like last year in March. So we did bought the buyback in between, because it was clear that we had to do it. But normally we would be willing to do consistently, but as Luciano mentioned, we have to talk to the Board. And you should expect of course dividends above minimum payment.


Our next question comes from Mr. Carlos De Alba with Morgan is Stanley.

Carlos De Alba -- Morgan Stanley -- Analyst

Thank you very much. Good afternoon. I guess on the same topic. Eduardo, Luciano, are there any, I mean clearly the company generates a lot of cash flows, it was surprisingly strong quarter on that regard, as you mentioned prices are higher. Are there any caps or limits to the amount of dividends, special dividends that you would propose the company or the Board for the company to pay? I guess the regular dividends are very clearly defined by a formula and we can probably look at the growth capex growth -- potential growth projects on base metals. But other than that, is there any cap or limit to the amount of dividends that the company would consider paying back to shareholders?

And my second question, if I may, is on the Moatize divested process. How can we -- what are the expectations in terms of timing or next steps that we should expect from that process? And also Luciano, maybe if you can walk us through how the -- yeah, the process or the incorporation of what is Nacala into Vale books would would look like?? I guess you have to increase your debt and your interest payments in the coming quarters. Thank you.

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations


Eduardo Bartolomeo -- Chief Executive Officer

Luciano, just maybe -- maybe so I'm just going to the first one. I think there are no gap. There's always a balance of course, and again, we need to assess market conditions, debt structure, capital structure. And then again, as I think you pointed out very correctly, our capex is really well behaved, is all up -- all around platforms, but we're also -- you don't -- you shouldn't expect extreme capex, so there is nothing in our radar like that. And secondly question that a lot of people make, so I'll take the opportunity to make it clear, there is no transformational M&A in our radar as well. So with that said, and Luciano mentioned in the beginning of this, paraphrasing Luciano, the return is going to go to the shareholders, right, Luciano?

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

Yeah. On Moatize, so we just finalized the revamp. We're starting to ramp up, we hope it will be quick. We hope by the beginning of the second half, we'll be already producing at 50 million tons. By the end of the year, we should receive the equipment on-site in order to upgrade the production to 80 million tons. If you consider today's thermal coal prices and met coal prices are little higher than that, maybe 130, 140. The business can turn EBITDA positive quite soon and be cash flow positive at the beginning of next year, without the burden of the project finance, and that goes to your following question.

The burden of the project finance was always felt within Vale's financial results through the EBITDA of coal. So coal EBITDA is penalized today because the mine pays a tariff for the corridor which is punitive because it needs to be, so in order to repay the project finance. So when you watch less than 150 million, for example, EBITDA for coal, about 100 million negative is just a service of the project finance funded through the tariff. Once you purchase Mitsui, what's going to happen is that everything is going to be consolidated and therefore the project finance will become Vale's that and those 400 million a year or 300 million, 400 million, they will be seen at the financial statements, part of it as interest and part of it as just debt repayment.

But on the other hand, the coal EBITDA will immediately improve by the same amount. And so that's why I'm saying that you don't need much in order to turn coal EBITDA as a business positive, you just need to produce and price is slightly better than what you're seeing today. So -- and that leads us to the next stage, which will be, given I do have a project finance, which bears Mozambique and risk and higher interest rates, there is obviously the opportunity to refinance at much lower Vale corporate rates and save money with that. That's what we're going to do.

In terms of timing for the divestiture, we already have over 20 NDA signed with interested parties. Obviously there is a way to go between people wanting to look at the asset and offering a firm intention to bid. We hope that we start to going to have those intentions again by beginning of the second half. Obviously, people were going to do a lot of diligence on that. And if we succeed, hopefully the target would be to try to sign a deal before year-end. Some variables put some risk on that, so obviously there is this dispute between China and Australia, which is waiting on met coal prices. Now, you have all the COVID-19 situation in India, which is a big importer of thermal coal and also good weight on international thermal coal prices, so let's see. If we're a little lucky, I believe we can sign a deal still by the end of the year.


Our next question comes from Mr. Alfonso Salazar with Scotiabank.

Alfonso Salazar -- Scotiabank -- Analyst

Nice update, and good morning everyone. I want to ask about the outlook of the pellet market. And if you can provide some guidance regarding production for the rest of the year and in the coming years. If you can give us some color on that.

Marcello Spinelli -- Executive Vice President, Ferrous Minerals

Okay. So first of, it's Spinelli here, thank you for your question. Well pellet market, let's talk about the demand side. It's -- in the split this in blast furnace pellet and direct reduction pellet. The blast furnace pellet is quite as same as iron ore. We are not in China, China is going really well, it's related to -- due to the problem of necessity to improve the use of the blast furnace is there. But the same pattern you see in ex-China, that's our market, very good prices, steel prices margins and assessed to improve the production. So from this perspective, you can see a room for sales and premiums.

The supply side in the other hand is a limitation. There is the limitation today and Vale is the key, a producer and the key opportunity today. We expect the production this year, slightly better than the year before. The limitations the pellet feed production, we have the temporary restrictions to disposal our tailings in the main sites of Brucutu, Itabira, so we don't expect to produce more than this year, but we are targeting to go back to the 60 million tons capacity for next year. We're not -- I'm not saying that [Technical Issues] to 60 million tons, but we want to be ready to do that. It depends on the the demand perspective, the market perspective to define that.

So as a conclusion, we see a market that the premiums, we double the premiums in the first quarter compared to the last quarter last year. This current quarter, we again have another twist in the premiums and we expect there is room for some another increase in the premiums as you have -- the demand is really tight supply demand side.

Just an update about the direct reduction market. That's quite the same that I mentioned for blast furnace. We have two more ingredients here. USA coming really fast in their economy and all the stimulus there are coming. They are -- they produce -- they use a lot of scrap, but they need pellets to improve their production, direct reduction, and the Middle East is our main market. Because of the U.S., the increase of the use of scraps, the price of the scrap in Turkey is really high that make our clients -- but they can charge higher price, they have good margins now. And in that, definitely there is room again to improve the margins, improve the premiums in this market. So the outlook for this year, demand -- the supply is limited and we can see good premiums because of the demand that is strong in place.


Our next question comes from Mr. Christian George with Societe Generale.

Christian Georges -- Societe Generale -- Analyst

Thank you very much, and well done with your medical assistance in Brazil. Looks very good indeed. I had two questions for you. One of them is, you just said no transformative M&A even in the scenario of higher prices for longer and large cash flow. Does it exclude also some small M&A on copper because you're in your statement, you seem to be very positive near-term and long-term on copper outlook. So is this scenario where you may some consider putting some cash in a large cash availability scenario? And on the side of that, would you consider any investment in hydrogen in the context of your customers and steel sector in trying to move to green steel, decarbonize, can you be part of that or is that something which you're just looking at from a distance?

And the second question is on nickel, you're out of New Caledonia, you'll see obviously in Indonesia. What was the situation with Class 2 nickel out there moving to being able to do sulfate and serve the battery market. Is it something you're still looking at down there or is it something you're looking at on the -- doing from Canada and Brazil? Thank you.

Eduardo Bartolomeo -- Chief Executive Officer

Hey Christian. First of all, thank you for the acknowledgment of the medical assistance. Thanks very much with our team. Yeah, so you're right, there is no transformative M&A, we are always looking for copper. It's very hard as you might understand but we could -- we shouldn't stopped. So that obviously is one area of interest. Another area of interest is energy and you know you have a -- we have a very bold goal to to eliminate our clean energy to -- not eliminate, substitute if all of them our matrix for clean so might happen to have some very small acquisitions on that side of that environment. And hydrogen specifically, it brings us to another subject that is very dear to our heart because we just announced the Scope 3 targets, one of the few that did that by the way. Then -- and we are following up some players that are doing that, but necessary, I think more on the watching, how can I say that, seat. We are actually working very close to our customers as it's been adequate go, but I think because of time constraints we wouldn't go there that far, but we are looking to help our clients with high quality iron ore and high quality metallics that will be needed if hydrogen and we believe hydrogen is the best together with with carbon capture, best alternatives for the steel industry. But we are watching closely where the hydrogen is happening, but no investments on that OK.

And I think for nickel, I think it's better to Mark to answer. He'll will be more short and more objective.

Mark Travers -- Executive Vice President, Base Metals

Okay, sure. Christian, in terms of class, sorry the sulfate, you're right, the primary area of focus would be the Canadian nickel, but there are opportunities in Indonesia, the most prominent of which is the coal HPAL project that is being studied and being discussed with Sumitomo Metals, that would be a clear -- that product will clearly go into the sulfate market so that one's right in front of us. The other ones are, I would say, aspirational or early -- there are opportunities, but nothing really of significance at that point in time. For example, there are HPAL projects that are on the books by others in Indonesia and there are parties that are interested in our alignment, for example, but there is nothing significant at this point in time.


Our next question comes from Mr. Andreas with UBS.

Andreas Bokkenheuser -- UBS -- Analyst

Thank you very much for taking my question. I hope you're all safe and well. But Two questions, a volume question and then a freight question. The volume question is kind of two parts and you talked about it a little bit already. But Vale, obviously has a number of licenses that are kind of required to reach your production goal of 400 million tons down the line. Is there any kind of comfort or clarity that you can give us on these licenses? I mean are they merely a formality, you obviously expect to get them, but is there any kind of visibility you can get that, they're not going to be significantly delayed at this point in time, either conversations with the state of federal government on this? That's the first part of the first question. And within that, you obviously you've always had a focus on value over volume as has Australian peers. And one of the things I'm thinking about there is your additional capacity as it kind of materializes out of the Northern System in particular, but Vale's consolidated capacity could be 450 million tons. We're sitting at almost $200 a ton on iron ore and if ever there was a time to kind of monetize that additional capacity, I would think it would be now, and basically add additional volumes beyond the 400 million tons with iron ore 200. So how do you think about that strategy value over volume given where prices are and given that you could have additional capacity throughout Vale's just going forward. That's kind of the first, sorry slightly long volume question.

And then the second question is on freight. Luciano, you talked about a bit of freight inflation obviously and how it impacts your second half of the year. How does that -- if we look beyond the second half of the year, if we look into 2022, 2023, Vale is obviously going to be putting more volume into the market that could keep freight rates high, like if we're still sitting at $28 a ton, by the end of next year, is there additional freight inflation that kind of flows through your P&L or are you still well protected on your freight contracts/ So that's just a longer-term view on the freight cost. So those are my two questions. Sorry if they were a little bit long.

Marcello Spinelli -- Executive Vice President, Ferrous Minerals

No, no problem Andreas, Spinelli speaking. Thank you for your question. Regarding the risk to achieve the volumes. Obviously the licensees or authorizations are always in our track and then we try to plan with some extra delay to keep the -- our planning OK. So what you see, if you split the challenges in three, the North, we need to keep the license as a rolling process. We just got the license of us -- a pit in Serra Sul in S11D. So it's -- business as usual is going well, we don't see any delay.

In the Southeastern System, we are really close to bridge the gap of the lack of of capacity -- dams capacity to install the filtration. So it's in our hands actually. We have final licenses, yes, we have, but we don't see any big deal. And I explained about the -- told to them that means you have to do this, but if have delay we have a fallback position for that. We -- I'm emphasizing that, we are trying to bring in our planning process buffers, contingencies to be reliable in the end of the day.

Jumping to your second part of -- the second part of your question, Vale revolving is a mantra. So we are ready to bring back the 400 million tons and we are building the extra 50 million tons, that's 450 million tons. Why? We want to be OK with -- that we want to be reliable with our targeted of 400 million tons, and we can use an extra 50 if the market demands that. So that's our mantra. We're going to decide these as we evolve in the market. So again, but definitely we need to be ready for an extra capacity.

And about the freight which, I think you can -- start you can finalize that. The freight side, we -- I can say that, we are less exposed to this quarter for this first half, Luciano said, second half it's seasonally more exposure to the spot freight, but don't -- you must have in mind that we are bringing an additional 18 guaibamax ore this year that will match for the demand of 400 million tons and an extra 6 new castlemax for our fleet. We are talking about 170 vessels in our fleet today. So we are growing this natural hedge for the spot market freight and definitely, we consider the inflation today. And the last problem was really related to small vessels, two Panamaxes that just came the soybean seasons, that make this happen and contaminated the vessels market. So again, we need to live this, we're not forecasting any big inflation for the spot market and we are working hard to have our own fleet to offset any problem in the market. And an additional point is, total fleet today, we have installed all this scrubbers, that's another point that we are not being affected to the gap between the high sulfur and low sulfur and so. So the shipping business for us is very important to be stable.

Eduardo Bartolomeo -- Chief Executive Officer

Said it off.

Marcello Spinelli -- Executive Vice President, Ferrous Minerals



This concludes today's question-and-answer session. Mr. Eduardo Bartolomeo, at this time you may proceed with your closing statements.

Eduardo Bartolomeo -- Chief Executive Officer

Okay, thank you. Thank you very much for your attention and questions and interest to talk to us. I think we've been repetitive in that way from day one, it's a marathon that we're going through. I think in the Vale Day we said, derisking, reshaping and rerating. The risking is advancing pretty well, still a lot of mantras to achieve. For example, be better on safety, be more assertive on production, but we did strides very good on being capital disciplined, this is zero doubt that we are on that. Reshaping VNC is a -- Brumadinho is good example of how to do it with respect with communities, Mozambique is going to be another one and rerate going to -- what it's going to be our final mark. So we're going to be a more reliable and more safe and a more human organization that will be priced correctly. So thanks a lot. Thanks a lot for your questions, because that moves us to the right direction and hope to see you in the next call.

Duration: 67 minutes

Call participants:

Eduardo Bartolomeo -- Chief Executive Officer

Marcello Spinelli -- Executive Vice President, Ferrous Minerals

Luciano Siani Pires -- Executive Vice President, Finance and Investor Relations

Mark Travers -- Executive Vice President, Base Metals

Alex Hacking -- Citigroup -- Analyst

Timna Tanners -- Bank of America -- Analyst

David Gagliano -- BMO Capital Markets -- Analyst

Carlos De Alba -- Morgan Stanley -- Analyst

Alfonso Salazar -- Scotiabank -- Analyst

Christian Georges -- Societe Generale -- Analyst

Andreas Bokkenheuser -- UBS -- Analyst

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